Good news for economy

The Straits Times, May 12, 2007
by Terrence Voon

SINGAPORE'S economy will likely get a turbo-charged boost from the new Formula One race in September or October next year.

But the future is less rosy for hotels hoping to reap maximum revenue from the Grand Prix.

For the government's plans to impose a special F1 Cess tax of up to 30 per cent to defray the cost of staging the event may dampen their spirit somewhat.

The proposed Cess will be structured such that hotels which offer good views of the street circuit will be taxed more, compared to those further away from the action.

It is expected to boost the government's coffers by an average of between $15 million and $20million each year.

Announcing the move yesterday, Minister of State for Trade and Industry S. Iswaran described hosting an F1 race as 'a major financial undertaking'.

'The annual cost of staging an F1 race can be up to $150 million,' he said. 'STB will, therefore, co-fund about 60 per cent of the cost of the event from the Tourism Development Fund.'

Hotels in Melbourne and Monaco typically raise their room rates by up to three times when the F1 carnival comes to town.

CIMB-GK Research economist Song Seng Wun says that is why hotels should be more than happy to chip in their fair share of the revenue.

'It is not unexpected, seeing what has happened to hotel room prices in other F1 cities during the race. They do make quite a profit.'

Mr Iswaran said local hoteliers have been consulted on the proposed Cess, and that 'feedback has been positive'.

But Song feels the tax would need to be tweaked in the coming years, saying: 'We'll have to see how hotels perform next year. If the Cess does not work, they should go back to the government and ask for a review.'

Kevin Scully, managing director of NRA Capital, feels that the government should reconsider the F1 tax.

'I'm not sure if there is a need for this. The government should not be rushing to get a payback from the event so quickly, seeing how it will have much wider benefits for the economy.

'What they could have done is to buy an equity stake in the private company started by the race promoters, and make their money back from there.'

Mr Iswaran said the event is likely to boost Singapore's tourism receipts by about $100 million a year.

The Singapore Tourism Board's deputy chairman and chief executive Lim Neo Chian added that a large proportion of the expected 80,000 F1 fans for the race will be visitors.

But Jimmy Koh, head of economics treasury research at UOB, says it is difficult to predict how much the F1 cash cow can bring in.

'This is uncharted territory for Singapore, and we cannot say for certain how consumers will react.'

But the experts agree that the race is unlikely to be a loss-making venture.

Said Koh: 'It's a new paradigm, but maybe after the first few years, the race will be self-funding.'

Scully added: 'I think the event will easily pay for itself. The after-effects and the spin-offs from an F1 race will more than make up for the cost.'

Song believes that the economic windfall from F1, while significant, will not be dramatic.

'I don't expect next year's GDP to jump by a whole percentage point because of the race - maybe a decimal point or two.'

Lessons learnt from the International Monetary Fund (IMF)-World Bank meetings last year may prove to be useful.

Back then, retailers expected to see an upsurge in business, but were instead greeted by few customers during the event.

Said Koh: 'The IMF was a business event, people were cooped up in meetings all day. The F1 is different - it's a lifestyle event, and the people involved are expected to shop hard and party hard.'

Businesses on a whole, not just those in the hospitality and retail industries, are expected to enjoy the benefits of a Grand Prix held here.

'It's going to have a much wider influence,' said Song.

'The satay stall at Lau Pa Sat will sell more satay. Even public transport operators will benefit, because the roads are closed and people have to take the MRT.'

On the whole, experts agree that Singapore has done the right thing by laying its bets on F1.

Said Song: 'Despite the higher risks involved, this is a good sign that Singapore is looking beyond the usual things like manufacturing, multi-national companies and so on.'

Koh added: 'The whole economic dynamics of Singapore will change in a few years' time and the F1 is just part of it.

'It's going to make the whole concept of Singapore as a global city more complete.'




With the exception of Singapore and Valencia, the rest are track races,
and hence have higher start-up costs. In general, hosting fees for F1
races cost about US$35 million (S$53 million). Returns have been
estimated at between US$100 million and US$200 million.

SINGAPORE (2008)
Will spend $150 million a year. Comprises sanctioning fees and logistical costs, like
setting up a street circuit and temporary stands
Will earn At least $100 million

VALENCIA (2008)
Will spend $53 million a year for hosting rights
Will earn: Not clear yet, but Spanish Grand Prix in Barcelona earns an estimated
$190m a year

BAHRAIN (STARTED 2005)
Spent $230 million on its purpose-built stadium circuit

SHANGHAI (STARTED 2004)
Spent $456 million on a new circuit

TURKEY (STARTED 2005)
Spent $106 million (new Istanbul Speedpark). Also invested $365 million in the track,
surrounding infrastructure and roads
Earns: $151 million

MALAYSIA (1999)
Spent $84 million. Sepang track cost $130 million
$175 million boost to the economy
Generated $653 million for the 2004 race

The 2006 GP generated $600 million, almost three per cent of the country’s GDP